The winners in business have shifted markedly in the past decade—and the keys to success are likely to be very different again in ten years’ time. How should leaders prepare their companies to thrive in a rapidly evolving landscape? What will it take to win the '20s?

Global Capital Markets 2018: Embracing the Digital Migration

The redistribution of value that began in the aftermath of the financial crisis has become a steady shift in the decade that has followed, driven by the migration to digital services, processes, and business models. Although the capital markets revenue pool grew 7% in aggregate from 2016 to 2017, investment banks, the highest-profile group of players in that pool, now capture only 33% of total revenue, down from 48% in 2006.1 As technological advances and a more diverse array of industry participants challenge the historical dominance of investment banks, the digital migration represents a systemic disruption that, if anything, is likely to pick up pace in the years ahead.

For investment banks, 2017 marked the fifth consecutive year of declining revenues. Despite the recovery from the economic crisis over the past decade, top-line growth has been hindered by stringent restriction on capital and leverage and heightened regulatory scrutiny. Banks have responded by reemphasizing market share growth rather than just capital and liquidity optimization as well as by reducing costs and sharpening their focus to increase scale in specific asset classes. However, these efforts, while considerable, have not been enough. Data-enabled products, improved automation, strong value chain and ecosystem integration, and other benefits from digitization have raised the stakes while attracting new players to select niches. As a result, investment banks have seen their primacy in the capital markets arena tested by changing customer needs and preferences; by digitally advanced products, platforms, and services; by the entry of adjacent and nontraditional players into the market; and by the constraints imposed by regulators.

The reality is that many incumbents have yet to evolve their capital markets business models deeply or quickly enough. While most banks have experimented around the edges—partnering with fintechs or exploring some new revenue opportunities—the lion’s share of their efforts have focused on more traditional responses, such as rationalizing costs, taking market share from peers, and increasing scale. While important, those conventional responses ignore the ongoing erosion taking place in the core investment-banking business model.

The only way for banks to regain their footing and do materially better over the next decade than they did in the decade following the crisis is to address the root causes of the deterioration. To protect their long-term futures, we recommend that investment banks in particular focus on five areas:2

Be relentlessly client centric. The digital migration has shifted the competitive battleground to the quality of the client experience. Banks whose business models remain mired in a product-first mindset instead of one focused on securing and enhancing the client relationship will find themselves sidelined. To thrive, banks must replace their traditional client service approach with new ways of protecting the client interface. Investment banks should adopt a bank-as-a-platform model in which they serve as a convenient one-stop shop for a variety of products and services, from both banks and their partners. Dominant platform providers will be in a much stronger position to own the client relationship and dictate commercial terms. In addition, banks need to change their servicing approach internally and establish a single point of client contact that is responsible for coordinating all services across the bank. Clients with similar capital markets needs and behaviors should be clustered into segments to ensure effective client service and efficient resourcing. For institutional clients, this likely means developing and expanding a multiasset execution platform; for corporate clients, it likely means further expanding integrated cash management, trading, and foreign exchange (FX) hedging platforms for corporate treasurers. Acting quickly on these measures could preempt other banks and providers that adopt the same strategy from getting too far ahead—a move that could relegate laggard banks to serving as product providers for other ecosystems.

Be information advantaged. Banks should treat data-driven intellectual property and analytics as one of their most valuable assets. Investment banks sit on enormous troves of IP, but too few recognize, much less take meaningful advantage of, the value that IP can generate beyond their trading businesses. Insights mined from market, transactional, and other data can be packaged with appropriate protections to create new products and unlock important new revenue streams across the bank. Capital markets players can then look for appropriate channels to help monetize those insights, such as through partnerships and through the development of application-programming interfaces (APIs). IP can also be used to provide superior customer service while helping banks increase their share of wallet with clients. Just as Amazon provides customers with recommendations based on their purchasing histories, for instance, banks can use technology to better understand customer needs and propose more relevant solutions. As with any strategic asset, effective data and IP management requires C-suite-level leadership and a cohesive, firm-wide approach to managing and prioritizing IP initiatives.

Reimagine the technology architecture. To accelerate their digital transformation, banks need to adopt a next-generation IT architecture. Built on the secure cloud, these architectures use flexible, container-based applications and APIs, giving banks access to a modern, flexible, lightweight IT backbone and letting them decouple data from legacy systems. That decoupling allows banks to access information resources more easily for internal use and make data available to external partners and developers. Basic backbone improvements can help banks streamline and standardize routine processes, allowing them to become faster and far more cost efficient when approving client accounts, processing trades, and generating required regulatory and client reports. These are table stakes steps that banks must take to stay in the game. Beyond that, banks need to use their IT capabilities to enhance and expand their product portfolios, taking advantage of cloud-based solutions and APIs to identify trading ideas and opportunities based on proprietary research or IP. In addition to having strong embedded security protocols, the architecture should enable integration with external systems, devices, and service providers and have a data layer capable of sharing data clusters across the bank. Accelerating that type of infrastructure development can provide banks with the engine needed to unlock data-driven insights and improve client service.

Think like a digital leader when it comes to talent management. Banks used to have their pick of top graduates from elite universities. But the rapid growth and prominence of digital leaders like Google and Amazon and the emergence of innovative fintechs and boutiques has changed that. Today’s top talent—especially those with sought-after technology, engineering, data science, and mathematics skills—enjoy newer and often more attractive alternatives. With more institutions competing for the same high-caliber talent, banks must change how they recruit, develop, and retain the personnel needed. To create work environments and career opportunities that match or surpass those provided by other employers of choice, banks need to develop a strategic workforce plan; research best practices in hiring, development, and retention; and look at nontraditional ways to keep talent happy and motivated. That can include designing collaborative workspaces, sponsoring secondments in different departments or geographies or even with leading technology companies, and evaluating innovative employee perks.

Work in an agile environment. To deliver on the new business paradigm, the industry must embrace agile practices more broadly. While agile techniques have their roots in software development, many companies have applied the approach across their enterprises to link the business and technology organizations, improve efficiency, and drive results that are more customer centric. This methodology can enable the rapid development and delivery of the platform model that banks and others in the industry will need. It relies on end-user feedback, data-driven decision making, iterative development, and cross-functional and empowered teams to deliver better, less expensive, and faster outcomes.

The takeaway is clear. To thrive in the digital migration, banks must embrace it. They must evolve their business models—and quickly. If the near-term macro environment continues to be unfavorable, performance pressure will escalate. Even a momentary easing or a favorable change in volatility should be seized with urgency. Banks need to use any such opportunity to hasten their business transformation. That is the only way they will continue to remain viable and profitable in this rapidly changing market.

In this report, investment-banking revenues refer to the revenues generated by the investment-banking divisions (M&A and securities issuance) and the institutional-securities (sales and trading) divisions of banks.

2.

Other players in the capital markets ecosystem, such as exchanges and proprietary trading firms, are thriving, and their strategies merit discussion. But while many of our recommendations in this report are applicable to these players, the primary focus of this report is the investment banks.

Subscribe to our Financial Institutions eAlert.

Boston Consulting Group is an Equal Opportunity Employer. All qualified applicants will receive consideration for employment without regard to race, color, age, religion, sex, sexual orientation, gender identity / expression, national origin, protected veteran status, or any other characteristic protected under federal, state or local law, where applicable, and those with criminal histories will be considered in a manner consistent with applicable state and local laws.

BCG uses cookies to improve the functionality, performance, and effectiveness of our communications. Detailed information on the use of cookies is provided in our Privacy Policy. By continuing to use this site, or by clicking "I agree," you consent to the use of cookies.